Silver Lining in Weak Factory Orders Report

Investors received some evidence Monday that the manufacturing sector's expansion continued this summer. While the U.S. Commerce Department announced that factory orders fell 0.5% in August, the more-telling ex-transportation orders actually rose 0.9%.

A Bloomberg survey had expected August factory orders to fall 0.3%, after rising a revised 0.5% in July, up from the previously estimated 0.1% gain, and falling 0.6% in June.
U.S. Core Industrials Continue to Expand

Investors follow the ex-transportation component because it factors out the often-volatile transportation orders for such items as aircraft, aircraft parts and autos -- and hence provides a a more-accurate measure of core industrial conditions. Hence, August's 0.9% ex-transportation increases shows a core-industrial segment that continues to expand at a decent pace.

In addition, July's ex-transportation tally was revised to a decline of 0.9%, an improvement from the previously estimated 1.5% July decline; the ex-transportation component fell 0.6% in June.

Excluding defense, factory orders fell 0.5% in August, after rising 0.5% in July and falling 0.5% in June.

Earlier, the Institute for Supply Management announced that its manufacturing index dipped to 54.4 in September from 56.3 in August -- but remained above the key 50 expansion/contraction demarcation level.

Economists follow the factory orders statistic because it provides one of the most comprehensive surveys of advance orders for durable goods -- how busy factories are likely to be in the period ahead.

Factory orders also are a major value-added component of the U.S. economy. However, economists caution investors not to put too much emphasis on the initially released factory order monthly stat, as the total typically is revised in subsequent monthly reports as more-complete data becomes available to the government.

August's factory orders report confirms that the nation's manufacturing sector continues to expand, but at a slower pace. The slower growth is consistent with other metrics that show that the overall pace of growth in the world's largest economy slowed in the second quarter. Further, so long as the ex-transportation manufacturing segment continues to expand, the likelihood that the U.S. economy will fall into a double-dip recession remains remote.